Japan‘s annual consumer inflation rate ticked up in November and a key price gauge hit a more than three-year high, suggesting that firms are gradually passing on rising labour costs and a tax increase to shoppers.
Still, the inflation rate remained far below the Bank of Japan’s 2 percent target, underscoring the challenge the central bank faces in supporting prices as the economy shows signs of slowing, even in the face of a record government budget.
The core consumer price index (CPI), which excludes volatile fresh food prices, rose 0.5 percent in November from a year earlier, government data showed on Friday, matching a median market forecast and accelerating from a 0.4 percent gain in October.
The so-called core-core inflation index, which strips away the effect of both fresh food and energy costs, was up 0.8 percent in November, marking the fastest year-on-year increase since April 2016.
But after removing the effect of the sales tax and free pre-school education, core inflation rose by just 0.2 percent, the same rate as in October.
The latest figures follow an October increase in Japan’s sales tax from 8 percent to 10 percent, which has pushed up the prices of goods and services but also dampened consumer demand, a key driver of inflation.
The rise in the core-core CPI, closely watched by the BOJ as a key measurement of the broad inflation trend, reflects price rises for a wide range of goods and services, a government official told reporters.
Shoppers paid 5 percent more for sushi in November than a year ago and 8 percent more for a cup of ice cream. They spent 36 percent more on electric vacuum machines as high-end models sold well, the official said.
Analysts, however, doubt whether the rise will have legs given signs of a slowdown in the economy.
“The rise in inflation excluding fresh food and energy … is a positive sign for the Bank of Japan and will allow them to claim with more confidence that momentum towards their 2 percent price target is maintained,” said Tom Learmouth, Japan economist at Capital Economics.
“However, we expect underlying inflation to moderate to around 0.4 percent as the unemployment rate climbs,” he told Reuters News Agency.
Anaemic wage growth is still the main hurdle to long-term price gains, according to economist Hiromichi Shirakawa at Credit Suisse.
Unless income expectations rise, consumption will not increase sustainably and businesses will not be able to raise prices, he told Bloomberg.
But many analysts expect Japan’s economy, which expanded by an annualised 1.8 percent in the third quarter, to have contracted in the current quarter as the sales tax rise in October cools consumption.
Sluggish economic growth prompted Japan’s cabinet to approve a record budget of about 102.7 trillion yen ($939bn) for the next fiscal year on Friday, despite already struggling to rein in the developed world’s heaviest public debt burden.
The 1.2 percent increase from the current year will be boosted by record outlays for welfare and the military and other spending aimed at boosting the economy.
Abe’s administration is counting on economic expansion to boost tax revenues to help finance debt, as limited scope for monetary stimulus prompts global policymakers to focus on fiscal spending.
“We’ll continue efforts on reform of expenditure so as to juggle both economic revival and fiscal reform,” Finance Minister Taro Aso told reporters after a cabinet meeting.
“We are striving to achieve a primary budget surplus,” he said, shrugging off a view that the Bank of Japan’s ultra-low rate policy is allowing the government to effectively bankroll its debt.
Parliament must now approve the spending plan, along with a separate extra budget for this fiscal year, early in 2020.
“Despite the tax hike, public finances are worsening as the government expands spending to ease the pain of the higher levy,” said Koya Miyamae, senior economist at SMBC Nikko Securities.
Japan’s public debt is more than double the size of its $5 trillion economy, by far the highest among advanced economies. Bond yields have been suppressed by the BOJ’s money printing under a policy that caps 10-year JGB yields about zero percent, allowing the government to rely on cheap borrowing.
But the economy is still struggling to grow with households spending less for the first time in a year in October, even as wages crept up reflecting a tight job market.
Factory output suffered its largest fall in two years in October and big manufacturers’ business sentiment sank to a near seven-year low in the fourth quarter, underlining the fragile state of Japan’s recovery.
Left with little ammunition to fire up inflation, the BOJ is expected to keep policy steady for the time being – including at its rate review next month – unless a severe shock hits the economy.
BOJ Governor Haruhiko Kuroda has said the bank will take into account the expected boost to growth from the government’s spending package when it conducts a quarterly review of its growth and price projections at the January rate review.